LIVESTOCK MARKETS ASSOCIATION OF CANADA

by Mary MacGregor

Remarks by Mary MacGregor at AGM, May 12, 2001, Kamloops, BC

THE CATTLE MARKETING SYSTEM AND GETTING CLEAR TITLE TO CATTLE

Good morning—I appreciate the opportunity to come and talk with you about a couple of legal issues which trouble the livestock marketing system across Canada. My comments today are based on the law in British Columbia.

The two issues are (1) whether a buyer of cattle gets clear title to those cattle, and (2) when a sale yard or dealer—or purchaser of cattle for that matter—pays out the sale proceeds of the cattle, are you giving the money to the correct recipient, and what happens if you don’t?

What exactly is the responsibility of the sales agent with respect to any interest the seller’s lender might have in those cattle?

First, a little background. Bankers and other lenders lend money based on cattle value every day. Some of you, in fact, are lenders—cattle finance programs have become a profitable addition to many of your businesses. It is in the interests of producers and lenders to have an effective system to secure loans against cattle.

Lenders being lenders—they want to be so sure they’re going to get their money back—often require that cattle are used to secure the loan. That just means that the cattle are pledged—in one of two ways—to make sure that the loan gets repaid. The loan and the cattle are then linked.

There are two ways to secure loans against cattle.

The first is available to banks only. It’s called a s. 427 because it’s authorized under s. 427 of the federal Bank Act. S. 427 notices are filed with the Bank of Canada.

The second is available to any lender, including banks. It is under provincial Personal Property Security Act. Notice of PPSA security has to be filed in the Personal Property Registry.

How Do These Charges Affect Clear Title Going To The Buyer?

In 1997, the Supreme Court of Canada confirmed that a s. 427 includes an implied right for the borrower, the owner of the cattle, to sell the cattle if he or she is acting in the ordinary course of business. Although a s. 427 charge notionally transfers title to the cattle to the Bank, the implied right of sale in the ordinary course of business means that the Bank’s charge then leaps over to attach the money, or “proceeds” resulting from the sale.

Under the PPSA in British Columbia, cattle are usually considered to be “inventory”—which includes any goods produced for resale. It is possible that the breeding herd is “equipment”. Where that makes a difference, is that in BC, a charge on inventory which is sold in the ordinary course of the seller’s business, rolls off the inventory and onto the proceeds of sale. If the cattle are equipment, i.e. goods not produced for resale—and I’m not saying that they are, I’m just raising the possibility—then the charge follows the cattle.

In the case of either a s. 427 or PPSA charge, the cattle themselves pass free of the charge of the seller’s lender (except if the sale is outside the normal course of business).

What are the practice tips for you? (1) Are the cattle being sold the stock-in-trade of the person selling them? Are they his or her inventory? (2) Is this a sale in the ordinary course of the seller’s business?

Let’s talk about the ordinary course of business test for a moment. If a judge has to figure out whether the sale is in the ordinary course, the judge will want to hear evidence about all the facts about that particular seller. This is what’s called a “fact-based test” so it’s dependent on that seller’s particular circumstances. It is, in essence, a common-sense test.

This is where livestock sales agencies and dealers have an advantage—you know your clientele and you usually know what is their business and what are their usual patterns. You will normally have a sense of whether a sale is in the ordinary course of the seller’s business.

What about a producer who is dispersing his or her herd? I don’t know if that’s in the ordinary course of business or not. In that case, you might want to take special steps towards finding out who are his lenders and to make sure they get paid out, so the cattle pass free and clear to the seller.

In terms of clear title, there is one situation which is problematic, and that is whether or not the cattle are free of charges created not by the immediate seller—but by the person who sold those cattle to him. The answer is “not necessarily”. And the problem is that with our current systems, finding charges against unknown previous owners is difficult or impossible. I have no solution for that problem.

In summary, although you can run into problems of whether or not the buyer gets clear title to cattle, I consider it to be a smaller problem than the issue of conversion.

Let’s Talk About Conversion

In the livestock business “conversion” is shorthand for “did you pay out sale proceeds of cattle to the person who is legally entitled to them, because if you didn’t you may end up paying for the cattle twice”.

“Conversion” is a category of civil wrong—lawyers call it a “tort” which translates to non-criminal wrong done by X to Y. Negligence is a tort, trespass is a tort.

Let me first say that there is as yet no case in which the decision turned on whether a dealer or sales yard who pays a producer for cattle in the face of a lender’s registered security, is liable in conversion.

The Vold Jones Vold case, which is under appeal, did not technically turn on that point, although the judge made some by-the-by remarks which are certainly of concern.

I’m not trying to downplay the risk here. Other claims have been presented and settled, and it is clear from an early Alberta case (Nilsson and MacNamara) that an auction market can be liable where it pays a cattle seller who happens to have stolen and then sold the cattle.

So let’s assume that if you pay a producer for cattle when there is a lender with security on those cattle, you can be liable to the lender in conversion.

How does that come about? Remember when I spoke earlier about Bank Act charges having an implied right of sale, and with PPSA, a charge on inventory permits sale and clear title to the purchaser, but the lender’s charge rolls over to the proceeds of sale? The problem is that when you pay the apparent owner, you are converting the proceeds by paying them to the wrong person. The lender is the entity which is entitled to receive the proceeds, or at least some of them. Where you know there is a secured lender, the best course is to make the cheque payable to both the seller and the lender. You do not want to take on the responsibility of deciding who gets how much money.

So what can you do to protect yourself?

The lender has no obligation to notify you of the lender’s charge.

The legal answer is that you are supposed to search for registered security interests. It’s called “due diligence”, doing appropriate checks to safeguard your position.

For Bank Act filings, my staff can courier a search request to the Bank of Canada in Vancouver today, with appropriate fees, and request a faxed response, which we will likely get within a day of the delivery of the courier request. Then we have to contact the bank to find out exactly what is owed and what assets they have as security, because the charge can include assets other than cattle.

For PPR filings, anyone with a BC Online connection can access those records 24/7.

The problems with searching are:

Cost. This is definitely not free

Timeliness of the search. I have thought about this a lot and my conclusion is that it is close enough to impossible to search for charges on ring cattle. You have a better shot at it for TEAM or satellite cattle.

Name. Should you search Joe Bloggs? John Joseph Bloggs? John Joseph Bloggs Jr. or Sr.? John Joseph Bloggs Sr. and Evelyn Bloggs doing business as Bloggs Livestock? Heavenly Meadows Livestock? Or Bloggs Livestock Ltd. doing business as Heavenly Meadows Livestock?

Interpretation of Search Results. You need qualified staff to interpret search results. A charge which includes cattle, does not necessarily say “cattle” anywhere in the description of the secured property.

My reluctant conclusion is that searching is not a practical way for you to protect yourself in most circumstances.

Okay, What Can You Do To Protect Yourself?

A lot of people in Canada’s five western provinces have been working on this issue. Alberta in fact has a committee which is issuing a report on potential solutions right about now. Terry Schetzle has kindly shared a draft copy of that report with me.

Here’s what people have been thinking about:

Make the lender put a lender’s brand on the cattle

Have a special lien registry, just for cattle

What about an assurance fund? Several provinces have an assurance fund to make sure sellers get paid, what about an assurance fund to make sure purchasers get good title?

Hold the seller’s cheque for a couple of weeks waiting for search results

Changing provincial livestock identification legislation to establish a statutory defence, which I’ll explain in a couple of minutes

Make the seller disclose his lenders on the manifest where he ships the cattle for sale

What about insurance? This has not, historically, been a big problem. Why shouldn’t the insurance industry be prepared to insure it? And finally

Handle the issue from a risk management perspective. Have a dollar cut-off point below which you can albeit reluctantly handle the risk, and do your best to get searches for groups over that amount. Establish your own contingency fund.

I have a few comments about each of these proposals and then one final thought that offers a little bit of light at the end of the tunnel, and then I’ll be done.

First of all, lenders are very attached to their existing security regime. From their perspective, it is effective and cheap. So they are not excited about adding anything to the process of taking security—and the closer they get to the Toronto head office, the less receptive they are.

Lenders Brand – nixed. Lenders don’t want the cost, there are animal welfare concerns and public relations concerns, as well as loss of hide value.

Special Lien Registry – this is not a short term solution, although I believe it offers intermediate or long-term potential. Part of our problem right now is that we have one system which makes an effort to establish ownership of cattle, the brand inspection system, and another system for identifying loans attached to those cattle, and the two systems don’t mesh. Perhaps I am dreaming in technicolour here, but I believe that there is an opportunity to use national ID numbers, with producer consent or provincial legislation mandating it, in provincial-but-linked databases, so that lenders secure against national ID numbers and cattle ownership is actually tracked. It would be a virtual passport and security system. Of course this could only be done if electronic ID were the norm, but I think given how easy those tags are to read, that this offers some potential—as well as considerable difficulty. Before you shoot me down on this, let me just say that in the context of my work on environmental issues with Canadian Cattlemen’s Association, there is a potential that over the next ten or 15 years, to demonstrate that animal health and environmental concerns are met, there is a fair probability that cattle production will have to be tracked and certified along the way right through to the eventual consumer. There will be many problems, of which getting lenders on-side is one. The toughest problem, and I think your representatives on the Canadian Cattle Identification Board can attest to this, is getting all segments of the industry to work together.

This will only happen if the industry can produce some visionaries—people with a common understanding of the need and benefits of implementing such a program, along with the technological expertise to make it work.

Assurance Fund – dealer, sales yard or buyer pays a check-off which goes into a fund which is available to satisfy claims of unpaid debt on cattle. This idea has not found favour, because of the concern that industry participants could be reckless knowing that safety net is present. There are also a number of legal issues around insurance or insurance-like schemes.

Holding Cheques – the idea is the market or dealer would withhold payment for a couple of weeks while search information comes back and is interpreted. Given the need of livestock markets to remain popular with their clients, in order to have any clients, I don’t think this idea will have much support. It would only work if absolutely everyone did it. Not a practical solution. I believe there is a statutory two-day payment requirement in some provinces.

Statutory Defence – this is a new one on me, I only heard about it yesterday in Alberta’s draft report. This is one that the Alberta committee seems interested in. As I understand it, provincial Livestock Identification legislation would be changed. It will say that where an agent has arranged a sale or a buyer has bought cattle which are sold in the ordinary course of the seller’s business, the agent or purchaser can’t be sued in conversion. It would effect a repeal of the lender’s security interest in proceeds. Whether that will be successful against banks or not is an open question, because banking is federal and the Bank Act security is federal legislation. Also you market operators in Alberta or Saskatchewan or Manitoba may have the political muscle to get this by your legislators, but I can pretty much guarantee you that we in BC do not. So while I think this is a valiant effort, I do not know if it will stand up to legal scrutiny, nor if it can be validly legislated. I also think that the lenders amongst you need to think seriously about how happy you are with this proposal.

Require Cattle Seller to disclose lenders on manifest. The Alberta committee will be recommending this, I understand—the manifest will be changed so that the seller has to disclose his secured lenders, then the cheque will be made payable to both the owner and lender. This ought to help you make sure that the lenders of all the honest guys get paid. I don’t have an argument with it-- there are some circumstances where it just won’t help.

Industry Insurance. This is kind of an interesting one. Why shouldn’t this risk be insurable? I checked through a local insurance broker, who checked into this for me. The answer which came back is “no”--that the insurance industry sees this as a due diligence issue. They think we should reorganize our marketing system to make sure we honour the legitimate claims of secured lenders. However in conversation with some of you yesterday, it seems that there is some interest in Alberta for at least one cattle industry related insurer to take on the risk and provide insurance, and I’ve heard that Livestock Identification Service in Alberta is also looking at it.

Okay, One Final Thought

I had the pleasure of chatting with Murray Acton, a lawyer in Moose Jaw, SK, on this issue. Murray acts for JGL. He had a thought about how to handle this that I think is worth each of you considering, and I’ll tell you what it is.

Murray thinks we’re coming at this from the wrong angle. He thinks, and I agree, that trying to make the security system mesh with the marketing system is a difficult task. His concept is to just acknowledge that it is impractical to try and do any level of due diligence to ward off lender’s claims. Drop that attempt and move on to protecting yourself.

How to do that? Creditor proof your sales agency company.

How do you do that? Couple of ways—strip assets out of your existing company OR stick a new company without anything significant in the way of assets in as the new sales agent. In either case, keep profits and assets stripped out of that operating company, weekly or even daily.

The actual sales agent activity is then done in a company with almost no assets. If a problem arises and the company is successfully sued, the judgment will be a “dry judgment”.

I am not going to take any time here to explore when creditor proofing IS appropriate and when it is NOT appropriate, or any of the considerable legal, accounting, and tax issues that can advise. This is an issue to explore fully and carefully with your legal, accounting and tax advisors.

It is, however, something that you can look at individually and immediately to protect your own interests. Because industry-wide solutions with the support of all participants, lenders, producers, sale barns and dealers, are not here, not today.

And given the reluctance of some of the industry participants and lenders to consider solutions that work for everyone, it seems fair for sales agents to explore any lawful means to protect their assets while at the same time continuing to try to find global solutions to these issues.